Opinion | A long-term strategy to steer the economy out of this crisis4 min read . Updated: 21 Jun 2020, 09:18 PM IST
The Modi government’s covid response opens a gateway to future growth even as it helps pull India’s economy out of trouble
As an entrepreneur and then as a member of Parliament, I have seen my share of economic shocks—the 2001 tech bubble burst and then the 2008 global financial crisis. But they pale in comparison with the current shock to the global economy caused by the coronavirus that originated in China.
The world was unprepared for this significant shock. Because of the virus’s unfettered global spread in its early days, and so long as there is no vaccine and/or herd immunity, big risks to the economy will remain. In India, as in many other countries, the lockdown was necessary for our healthcare capacity to build up, but, along with global economic disruptions, it has impacted our economy.
The government has had to deal with unprecedented challenges, as citizens, enterprises and the government all bear the costs of this shock.
Estimates vary, but a 10% hit to India’s 2020-21 gross domestic product (GDP) is an assumption being made. If GDP contracts, it will have an impact on each of the three groups—citizens, enterprises and the government. When GDP contracts, enterprises and the government bear a larger share of the loss. For individuals, the loss is felt in compressed salaries, falling remittances, lower interest rates and dividends. For the government, it is in lower taxes and higher spending (higher borrowings), and for enterprises, in the levels of fixed costs that cannot be reduced even as revenues fall, thus impacting retained earnings and future investment cycles. Naturally, risk aversion and saving will increase among individuals. Businesses facing the country’s first sustained crisis in three decades will be cautious in spending or restarting, and will change their view of safety buffers.
The world is navigating uncharted economic waters. None of the typical economic theories can be applied here. As Y.V. Reddy, former Reserve Bank of India (RBI) governor, was quoted as saying, “We must first think of principles, not existing rules. Rules are meant for normal times." It is against this backdrop that the government’s economic policymaking needs to be analyzed. It has signalled a very important point, which is that the government looks at the current challenge as a long-term, continuing one. This is the correct approach. The sequence of policy action was what was required to be figured out—starting with the most vulnerable parts of our economy, like the poor, then the informal sector, and then moving up to micro, small and medium enterprises (MSMEs).
Recent indicators show that demand is picking up rapidly post the lockdown in many segments of the economy, while some others lag. So, it’s a good time to assess the path forward for our economy.
Assuming the present trends of recovery (both economic and in terms of healthcare), it is clear that our economy will take a few years to make up for the loss in GDP. The erosion in the retained earnings of enterprises is expected to be about $70-100 billion, and that will impact future investment cycles. And so one thing becomes clear. Over the next two years, the government will be the most important entity left standing and capable of leading a recovery.
Therefore, it is the government and indeed its institutions like RBI that will step up and expand their roles in the short-term. Their role will be to sustain the revival uptill a stage where private sector investments and consumption kick in and lay the path for a structurally high-growth economy. Rapid growth is the only answer to the question of India’s debt sustainability and Prime Minister Narendra Modi’s Aatmanirbhar Bharat vision of a self-reliant economy that is also globally competitive and growing rapidly.
So, in this sequence of policy actions, perhaps we can expect timely and well-targeted interventions by the government in the following areas:
One, healthcare capacity expansion, which will give both consumers and investors confidence in the economy, since the health and well-being of our communities that are bearing the brunt of this pandemic are critical for the economy to reach its full potential.
Two, financial sector measures, in order to deliver trust and capital to both enterprises and the government. The Modi government has rebuilt the financial sector from the depths of 2014, and the sector has never been stronger in recent history than it is now. It has acted as a strong buffer against the current shock. The policy focus here could be on using the financial sector to revive the real economy.
After the shock, non-banking financial companies (NBFCs), small private banks and bond markets have dropped off as participants. Enterprises depend almost completely on public sector banks (PSBs). Private banks are cherry-picking assets. So, while the share of PSBs in lending has grown in the period since the NBFC crisis, in-built risk aversion has placed limits on credit delivery. NBFCs played a significant role under the Modi 1.0 government in driving economic growth, and at one stage, they were delivering almost 40% of the incremental credit to the economy before the Infrastructure Leasing and Financial Services and Dewan Housing Finance Corporation scams broke out. RBI would be expected to bring NBFCs back into the credit delivery framework and also help support non-MSME borrowers impacted by the coronavirus shock.
So far, the covid pandemic economic policy response of the government has been sequenced and focused on a soft-landing first, and then rebooting the economy, leading to a gateway of sustainable growth. It recognizes that we are in a once-in-a-lifetime crisis, tackling a once-in-a-lifetime challenge to reboot with minimum damage to the real economy. This would give India an unprecedented opportunity for economic expansion amid tectonic changes in global supply chains.
Rajeev Chandrasekhar is a member of Parliament